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The Financial Services Council responds to criticism from Chapman Tripp over its proposal to cut tax on KiwiSaver

A lobby group for the KiwiSaver industry says a law firm which criticised its proposal to cut tax for the retirement savings scheme has got it wrong.

But Chapman Tripp partner Casey Plunket is standing behind his view that proposed changes by the Financial Services Council would create more inequity and would essentially be a subsidy for the scheme.

Financial Services Council (FSC) chief executive Peter Neilson said Chapman Tripp's analysis of its proposal had wrongly assumed that it wanted savers to stop paying tax on their income from KiwiSaver and just pay tax on the amount withdrawn at retirement.

"The author of the Chapman Tripp Brief wrongly assumes that our proposal is to stop KiwiSavers paying income tax on their KiwiSaver earnings as they are earned and delay payment of tax until the KiwiSaver withdraws their funds at retirement.

Instead Neilson said it wanted to change the effective tax rates on savings to the same marginal tax rates which savers pay on their other income.

It believes this would be possible by dropping the current KiwiSaver funds tax rates of 28 per cent, 17.5 per cent and 10.5 per cent to 15 per cent, 8 per cent and 4.3 per cent respectively.

The council has produced research showing a KiwiSaver member on the top fund tax rate of 28 per cent and income tax rate of 33 per cent would see a 54.7 per cent impact from tax on their cumulative return on savings over 40 years.

"Over 40 years saving someone in KiwiSaver would face an effective tax rate of 54.7 per cent when their KiwiSaver fund tax rate is 28 per cent and the marginal tax rate they pay on their other income is 33 per cent.

"You might ask, how can the effective tax rate be so much higher than either the KiwiSaver fund tax rate of 28 per cent or the marginal tax rate?" said Neilson.

But Plunket said he believed it was misleading the describe the 54.7 per cent figure as an effective tax rate because it was not an annual basis.

"The FSC seems to be claiming, for example, that a KiwiSaver investor who contributes for 40 years faces an effective tax rate of 54.7 per cent.

"The FSC then uses that 54.7 per cent figure to support its claim that KiwiSaver investment is over-taxed."

Plunket said he understood the Financial Services Council was not proposing to exempt KiwiSaver income from tax until the money was paid out or remove the KiwiSaver subsidies but if its claim that KiwiSaver was being over-taxed was correct then making those changes would be the best approach to solve the problem.

"The simplest way to get that figure down to 28 per cent or less for all KiwiSaver investors is to exempt KiwiSaver income from tax until it is distributed, plus remove the KiwiSaver subsidies."